Employee compensation and benefits

What is compensation?

Total of all rewards provided to employees in return for their work

People do what they do to satisfy some need, some payoff or reward.
Compensation consists of a package of pay, benefits, services and job related
awards
The principal goal is to increase peoples willingness to work in ones company
and to increase productivity
However, for all practical reasons, it is basically money
Compensation Administration
Provides an answer to the question how much should a job be paid
The goal is to design the lowest cost pay structure that will attract, motivate and
retain competent employees
Fairness, the employers perspective a salary that is commensurate with the
demands and the requirements of the job
Fairness, the employees perspective the returns in line with the inputs
Components of Compensation

Recognition
Programs

Wages/salary

Direct

Indirect

Incentives

Benefits

Nonfinan
Rewarding work
cial
Organizational
Support

Work Environment

Bonuses

Flexibility

Types of compensation
Intrinsic
Vs
Extrinsic

Performan
ce Based
Vs
Membersh
ip Based

Financial
Vs Non
Financial

Intrinsic compensation: Employees critical psychological state that results

from performing their jobs

Enhanced when jobs are rated high on five core job dimensions:
skill variety requires a person to perform different tasks and
involves different skills, abilities and talents
task identity - complete a job from start to finish
task significance when the job has an impact on the lives of other
people
autonomy freedom, discretion the employee has in determining
how to perform the job
Feedback providing employee with clear information about job
outcomes and performance

Extrinsic compensation: Monetary rewards: Given to employees according

to their performance levels or learning job related knowledge an skills. This
is core compensation. It includes base pay; cost of living adjustment;
seniority pay; merit pay; incentive pay; knowledge/skill based pay etc/.

Non-monetary rewards: Includes protection programs (medical insurance);

paid time-off (vacations); services (day care). This is fringe compensation
or employee benefits. This includes legally required benefits; discretionary
benefits etc.

Strategic compensation: Strategic decisions guide the activities of organizations

based on overarching plans
Tactical decisions support the fulfillment of the strategic decisions.
Strategic management is done uncertainty discerning threats and opportunities
based on environmental scanning but is an inexact process.
Competitive strategy is the planned use of the company resources to promote
and sustain competitive advantage.
Human resource strategies specify the use of multiple HR practices.
Compensation strategies deal with the use of compensation and benefits
practices that support both HR and competitive strategies.

Strategic
Decisions
General Tactical HR
Decisions

Specific Tactical HR
Decisions

Competitive strategy
Human resource strategy
Compensation strategy

Recruitment and selection

Performance appraisal
Compensation
Training
Seniority pay
Merit pay
Incentive pay
Knowledge and skill based pay
Two tier pay structure
Discretionary benefits options

Salary: A salary is a periodic payment form an employer to an employee, which may be

specified in an employment contract
While there was no first pay stub for the first work for pay exchange, the first work would
have required a human society advanced enough to have a barter system to allow work
to be exchanged for goods or other work.
A fixed payment at regular intervals for services, esp. when clerical or professional
In many countries, salaries are based not on the number of hours worked, but on general
job performance.
A salary is an agreed upon amount of pay that is to be extended at regular intervals, in
exchange for the competent performance of specific tasks within the workplace.
Salary is a fixed amount of money or compensation paid to an employee by an employer
in return for work performed.
Wages
The wage is a compensation, usually financial, received by workers in exchange for their
labor.
Monetary remuneration computed on hourly, daily, weekly, or piece work basis.
The share of the products of industry received by labor for its work
The share of the national product attributable to labor as a factor in production.
Perks :
Perks in simple word is also known as Employee benefits or Benefits in kind.
It is non wage compensation provided to the employees in addition to their normal
salaries or wages.
Employee incentive:
Informal word for perquisites which are privileges granted to employees in addition to
their salaries and benefits (such as medical and pension plans).
'True' perks have little or no cash value or tax implications and may include company car,
vacations, reserved parking space, spacious office, private dining and washroom
facilities, etc.
Allowance:
An allowance is a amount of money set aside for a designated purpose.
Parents giving some amount of money (pocket money) to the children is also known as
allowance.
Money given to employees who have to relocate due to their work.
The allowance is used to pay for expenses related to moving of residence such as
transportation, storage costs, temporary lodging and meals.
The allowance may be given in lump- sum or reimbursed upon submission of receipts.

Goals of Reward System

Attract
Competent
Employees

Retain
Employees

Motivate
Employees

Legal
Compliance

Cost
Effectivenes
s

Ensure
Equity

Qualities of effective rewards:

Valuable

Equitable

Competiti
ve

Visible
(Grab
Attention)

Cost
Effective

Bases of compensation:

Performanc
e
Time spent

Seniority

Task
complexity

Membershi
p
Expertise/s
kill

Determinants of employee compensation

External factors:

Legal considerations

Labor market rates

State of Economy and Cost of living

Labor union pressures

Internal factors:

Objectives of compensation

Policies of Compensation

Organizations ability to pay

Job evaluation

Employee Productivity

a) Legal considerations:

Government laws and regulations affect compensation management.

They stipulate minimum wages, overtime rates, and benefits that employers must pay.

They provide protection for certain groups.

Tax implications also influence compensation.

Organizations must comply with the legal requirements.

b) Union pressures:

Union pressures towards compensation decisions affect compensation.

Union engage in collective bargaining with employers.

Negotiated pay settlements serve as the basis for compensation system.

The strength of unions and the employers together with the organizations ability to pay
influence compensation management.

c) Market Rates:

The compensation system should match market rates.

Employers use surveys to find out about compensation rate in market

Overtime policies, starting salaries, paid vacations, benefits

Affected by inflationary pressures and state of economy.

Skills in short supply carry high rates of compensation.

The rates should be competitive.

d) Cost of living:

This factor is important during periods of rising prices.

It adversely affects the purchasing power.

It should be considered for compensation management.

e) Compensation policies:

The policies of the organization influence compensation. They serve as guidelines for
formulating compensation plan.

Organizations can be leader or follower regarding pay.

Compensation may tied to the cost of living for the worker.

f)

Compensating Expatriates:

How should a company compensate expatriate employees?

Expatriates are employees that company send to abroad for international

assignments
Equity and its impact on compensation and pay rates

The compensation system should be fair in terms of equity.

The rates should be the same for similar type of jobs within the organization.

They should compare favorably with going pay rates in other organizations.

Employee should view it as fair, equitable and valuable

Forms of Equity

External equity

How a jobs pay rate in one company compares to the jobs pay rate in other
companies.

Internal equity

How fair the jobs pay rate is, when compared to other jobs within the same company

Individual equity

How fair an individuals pay as compared with what his or her co-workers are earning
for the same or very similar jobs within the company.

Equity consideration:

The compensation system should be fair in terms of equity.

The rates should be the same for similar type of jobs within the organization.

They should compare favorably with going pay rates in other organizations.

Employee should view it as fair, equitable and valuable

Addressing equity issues

Salary Surveys

Method
s to
Address
Equity
Issues

Job Analysis and

Job Evaluation
Performance
Appraisal
and Incentive
Communication
Pay
s, Grievance
Mechanisms,
Job evaluation:
and Employees
Participation
Job evaluation determines the relative worth of a job to the organization.

Compensation system should be designed around jobs.

Job description and job specifications affect pay level and structure.
Employee productivity:

The new trend is to link pay with performance.

Productivity affects pay structure and level.

Employee abilities and motivation affect productivity.

Process of establishing pay rates

a) Conduct salary survey=Aimed at determining prevailing wage rates.A good salary

survey provides specific wage rates for specific jobs. Formal written questionnaire
surveys are the most comprehensive, but telephone surveys and newspaper ads are
also sources of information.sources of salary wages and information:employer self
conduct survey,consulting firms, professional Association, government agencies,the
internet.
b) Job evaluation=A systematic comparison done in order to determine the worth of
one job relative to another. There are 2 approach 1) intuitive 2) compensable factor

Compensable factor=A fundamental, compensable element of a job, such as

skills, effort, responsibility, and working conditions.

Preparing for job evaluation=1) Identifying the need for the job evaluation.2) Getting
the cooperation of employees. 3)Choosing an evaluation committee.4) Performing the actual
evaluation.
Methods for job evaluation
1) Ranking=Ranking each job relative to all other jobs, usually based on some overall factor.
Steps in job ranking: i) Obtain job information ii) Select and group jobs iii) Select
compensable factors. Iv) Rank jobs v) Combine ratings
2) Job classification=Raters categorize jobs into groups or classes of jobs that are of roughly
the same value for pay purposes. Classes contain similar jobs. Grades are jobs that are
similar in difficulty but otherwise different. Jobs are classed by the amount or level of
compensable factors they contain.
3) Point method= A quantitative technique that involves: Identifying the degree to which each
compensable factors are present in the job, Awarding points for each degree of each
factor, Calculating a total point value for the job by adding up the corresponding points for
each factor.
4) Factor comparision=Each job is ranked several timesonce for each of several
compensable factors. The rankings for each job are combined into an overall numerical
rating for the job.
c) Grouping similar job into pay grades=A pay grade is comprised of jobs of
approximately equal difficulty or importance as established by job evaluation. Point
method: the pay grade consists of jobs falling within a range of points, Ranking
method: the grade consists of all jobs that fall within two or three ranks, Classification
method: automatically categorizes jobs into classes or grades.
d) Price each pay grade= usually done or shown through the wage curve. Shows the
pay rates currently paid for jobs in each pay grade, relative to the points or rankings
assigned to each job or grade by the job evaluation. Shows the relationships between
the value of the job as determined by one of the job evaluation methods and the
current average pay rates for your grades.
e) Fine tune pay rates= Here we develop pay ranges and and correcting out of line
rates.

Develop pay ranges= *Flexibility in meeting external job market rates

* Easier for employees to move into higher pay grades *Allows for rewarding
performance differences and seniority
Correcting out of line rates= *Raising underpaid jobs to the
minimum of the rate range for their pay grade. * Freezing rates or cutting
pay rates for overpaid (red circle) jobs to maximum in the pay range for their
pay grade.
Compensating managers and executives=

Base pay: fixed salary, guaranteed bonuses.

Short-term incentives: cash or stock bonuses

Long-term incentives: stock options

Executive benefits and perks: retirement plans, life insurance, and health insurance
without a deductible or coinsurance

Compentency based pay=Where the company pays for the employees range, depth, and types of
skills and knowledge, rather than for the job title he or she holds.
Compentencies=Demonstrable characteristics of a person, including knowledge, skills, and behaviors,
that enable performance.

Why use compentency based pay?

*Support high performance work system * support strategic Aims *support performance
management.
Pros Of CBP= * Higher quality *Lower absenteeism and fewer accidents.
Cons Of CBP= *Pay program implementation problems * Cost implications of paying for
unused knowledge, skills and behaviors * Complexity of program * Uncertainty that the program
improves productivity.
Types of incentive plan

a) Stock Options
A stock option is an incentive offered to employees that want to invest their money into the
company stock by purchasing stock with pre-tax money. According to HR Guide, employees
that participate in a stock option incentive plan are able to defer paying income tax on the
gains realized by their stock purchases until the stock is sold. The company itself does not get
any kind of tax break by offering a stock option incentive, but it does reap the benefits of
selling more stock.

b) Profit Sharing

According to Business Town, profit sharing is another incentive plan done with pre-tax dollars. The
company sets aside a portion of their pre-tax profits and distributes that money to the employees. In
most cases, an employee must qualify to receive profit sharing by meeting company performance
metrics, and by having a predetermined amount of service in with the company. Some companies
offer to place the pre-tax dollars into the employees' company retirement plans, so it can add to future
fund growth. Companies may also develop a profit sharing percentage based on the amount of time
worked for the company, the position held within the company or a combination of both conditions.

c) Performance Units
According to the Society for Human Resource Management, one type of incentive plan for executives
is known as the performance unit. In the executive's agreement there is a schedule of financial
milestones that the company must achieve for the executive to get awarded a pre-determined amount
of units. The amount of a performance unit varies by company. Performance units are paid out based
on a schedule agreed to by the executive and the company.

d) Bonus Pay
The bonus pay structure is common in professions such as sales, marketing and production. When
the employees reach a predetermined goal, the company may create an incentive plan that pays a
bonus for going beyond that goal. For example, if a manufacturing plant has a goal of 100 units in a
month, the company may offer to pay each employee a bonus for each unit manufactured beyond 100
in that month.
e) GAINSHARING PLANS -- A plan that pays individuals or groups a share of expense savings attributable
to the efforts of that individual or group.

f)

Sales percentage: here the more employee sells the more he receive incentive. Therefore it
increases the productivity of the organization and employees get motivated.
Types of incentive
Individual incentive:

Piece work plan

Straight Piecework
Standard hour plan
Spot bonus
Organizational incentive

Profit Sharing

Stock Options

Employee Stock Ownership Plans

Group/team incentive:

Incentive bonus payments

Gain sharing plans/ Gain sharing

1) Employee incentive plan

Pay for performance:

Individual Employee Incentive and Recognition Programs.

Sales Compensation
Programs

Team/Group-based Variable Pay Programs

Organizationwide Incentive Programs

Executive Incentive Compensation Programs

2) Individual incentice plan

Piece work plan: the worker is paid a sum for each unit he/she produces.

Straight piecework: A fixed sum is paid for each unit the worker produces
under an established piece rate standard. An incentive may be paid for
exceeding the piece rate standard.

Standard hour plan: The worker gets a premium equal to the percent by
which his or her work performance exceeds the established standard.

Merit pay plan: A permanent cumulative salary increase the firm awards to an individual
employee based on his or her individual performance. And merit pay options are:

Traditional Merit Pay rewads

Annual lump-sum merit raises that do not make the raise part of an employees base
salary.

Merit awards tied to both individual and organizational performance.

Incentive for professional employees: Professional employees are those whose work involves
the application of learned knowledge to the solution of the employers problems(lawyers, doctors,
engineers and economist). And possible incentives are:

Bonuses, stock options and grants, profit sharing

Better vacations, more flexible work hours

improved pension plans

Equipment for home offices

Recognition based Awards: Recognition has a positive impact on performance, either alone or in
conjunction with financial rewards. Combining financial rewards with nonfinancial ones produced
performance improvement in service firms almost twice the effect of using each reward alone.
Online award programs: Programs offered by online incentives firms that improve and expedite the
awards process
Information technology and incentives: Enterprise Incentive Management (EIM) > Software that
automates the planning, calculation, modeling and management of incentive compensation plans,
enabling companies to align their employees with corporate strategy and goals.
3) Incentive for sales people
Salary plan: it is straight salary. Salesperson compensation method in which only a
fixed salary (but no commission) is paid. The amount received by a salesperson is a function of
time worked and not of performance as reflected in sales volume.
Commission plan: Pay is a percentage of sales results
Combination plan: Pay is a combination of salary and commissions, usually with a sizable salary
component. Plan gives salespeople a floor (safety net) to their earnings. Salary component
covers company-specified service activities.
Commission-plus-Drawing-Account Plan: Commissions are paid but a draw on future earnings
helps the salesperson to get through low sales periods.
Commission-plus-Bonus Plan: Pay is mostly based on commissions. Small bonuses are
paid for directed activities like selling slow-moving items.
4) Team or group incentive plan: incentive are based on teams performance.
Pros: a) Reinforces team planning and problem solving. b)Helps ensure collaboration.
c)Encourages a sense of cooperation.d) Encourages rapid training of new members
Cons :a) Pay is not proportionate to an individuals effort. b)Rewards free riders.
5) Organization wide incentive
Profit sharing plan: A plan whereby employees share in the companys profits. This
Increases workers sense of commitment, participation and partnership.
Employee stock ownership plan: A firm annually contributes its own stockor cash (with a
limit of 15% of compensation) to be used to purchase the stockto a trust established for
the employees.
Scanlon/Gainsharing plan:

Scanlo
n Plan
Philo
Ident
Com
Invol
Shari
soph
ity
pete
veme
ng of
y of
nce
nt
Bene
Coop
Syste
fits
Aterati
Risk variable pay plan: Put some portion of the employees
pay at risk. If
m weeklyForm
employees meet or exceed their goals, they earn incentives. If they fail to meet their goals,
on
ula
they forgo some of the pay they would normally have earned.
6) Incentives for managers and Executives
Short term incentive( the Annual Bonus): Plans that are designed to motivate short-term
performance of managers and are tied to company profitability.
Long term incentive( Stock options): The right to purchase a specific number of shares of
company stock at a specific price during a specific period of time
Performance plan: Plans whose payment or value is contingent on financial performance
measured against objectives set at the start of a multi-year period.
Golden parachutes: Payments companies make to departing executives in connection with a
change in ownership or control of a company
Guaranteed loans to directors: Loans provided to buy company stock. A highly risky and now
frowned upon practice.
Why incentive plan fails?

Performance pay cant replace good management.

You get what you pay for.
Pay is not a motivator.
Rewards punish.
Rewards rupture relationships.
Rewards can have unintended consequences.
Rewards may undermine responsiveness.
Rewards undermine intrinsic motivation.
How to implement effective Incentive Plans?

 Ask: Is effort clearly instrumental in obtaining the reward?

Link the incentive with your strategy.
Make sure effort and rewards are directly related.
Make the plan easy for employees to understand.
Set effective standards.
View the standard as a contract with your employees.
Get employees support for the plan.
Use good measurement systems.
Emphasize long-term as well as short-term success.
Adopt a comprehensive, commitment-oriented approach.
BENEFITS
Types of employee benefits
a) Supplemental benefits
b) Insurance benefits
c) Retirement benefits
d) Employee services
a) Supplemental benefits:
i)

Unemployment insurance: Provides for benefits if a person is unable to work

through no fault of his or her own

ii)

Vacation and holidays: Number of paid vacation days varies by employer.

For 2014: 35 Government holidays not including Saturdays

iii)

Sick leave: Provides pay to an employee when he or she is out of work

because of illness

iv)

Parental leave: In case of Nepal only maternal leave is granted . The 1992
Labor Act requires employers to pay 100% of wages for maternity leave of up
to 52days before or after each childbirth for up to two births. It also requires
employers to pay 50% of wages. The 1992 Civil Servant Act provides
maternity leave to employed women for up to 60days before or after
childbirth, for up to two births

v)

Severance pay: A one-time payment when terminating an employee.

vi)

Supplemental and unemployment benefits: Payments that supplement the

laid-off or furloughed(grant leave of absence to) employees unemployment
compensation.

b) Insurance benefits:
i)

Workers Compensation: Provides income and medical benefits to work-related

accident victims or their dependents, regardless of fault.

ii)

Hospitalization ,healths and disability insurance: Provide for loss of income protection
and group-rate coverage of basic and major medical expenses for off-the-job
accidents and illnesses.

c) Retirement benefits
i)

Provident fund: Age58 or upon termination of employment. The benefit may be

deferred until age60. A lump sum of employer and employee contributions plus interest
a year is paid. The Board of Directors of the Provident Fund sets the interest rate
based on the funds annual income.
iii)

Pension : Government employees also receive a monthly pension, up to 100% of

basic earnings. The surviving spouse of a deceased government employee also
receives a pension of up to 100% of basic earnings for up to 7years.

d) Employee Services:
i)

Personal services: Counseling Services, Employee assistance programs for problems on

stress, drug abuse and so on, Vacation facilities, Lunch and Learn Programs.

ii)

Job related Services: Subsidized Child Care, Elder care, Education Subsidies ,
Transportation e.t.c.

Flexible benefit programs

Each employee is given a limited benefits fund budget to spend on preferred benefits.
Flexible work arrangements are:
a) Flextime: A plan whereby employees workdays are built around a core of mid-day hours
when all workers are required to be present. Workers can arrange their own starting and
stopping hours before and after the core period.
b) Job sharing: Allowing two or more people to share a single full-time job
c) Work sharing: A temporary reduction in work hours by a group of employees during economic
downturns as a way to prevent layoffs.
d) Telecommunicating : Employees work at home using telephones and the Internet to transmit
letters, data, and completed work to the home office.